Amazon Sales Tax: Everything You Need to Know As an Amazon Seller
Do you know what one of the most complicated issues for many Amazon sellers is? Taxes. Specifically, sales tax. Sales tax on Amazon can be a confusing part of any business, and understanding the ins and outs of the law can be extensive and unclear.
Table of Contents
- Sales Tax on Amazon
- What is Sales Tax?
- When Do I Need To Collect Sales Tax?
- Product Taxability
- Apply for a Sales Tax Permit
- How To Collect Sales Tax on Amazon
- Reporting and Filing Sales Tax from Amazon Sales
- How to Get Compliant with Sales Tax
- Reporting and Filing Sales Tax from Amazon Sales
- Filing Taxes
- Going Forward: Do Your Research!
Sales Tax on Amazon
Today, we’re giving you a full guide to understanding the complicated issue of sales tax, including the basics, when it applies to you, and how to apply this knowledge to your Amazon business.
What is Sales Tax?
Sales tax is the tax that is paid for the sale of goods or services. When a seller sells a product, they might be responsible for paying a percentage of the sale as sales tax to the government, depending on the specific laws regulating sales tax in their area.
Typically, the seller collects sales tax from the buyer and uses this money to pay the taxes owed at the end of the tax period. If the seller does not collect the sales tax from the customer, they are responsible for paying the tax out of pocket. As an Amazon seller, it is so important to know the amount of tax you should collect so that you can meet your obligations for payment. Read on to find out how to do exactly that.
When Do I Need To Collect Sales Tax?
As noted, it is the seller’s responsibility to collect sales tax on their products so that they have the money owed to the government when their taxes come due. Because Amazon sales may take place in various areas across the country, it’s difficult to know which sales taxes apply to each sale you make.
Next, we’ll outline how to determine whether sales tax applies to each sale. Sales tax applicability depends on the product meeting two requirements – sales tax nexus and product taxability. These factors combine to determine whether you need to collect sales tax on an Amazon sale.
Sales Tax Nexus
Sales tax nexus means that you have a connection to a state that is so significant, you must charge sales tax there. A sales tax nexus represents a legally significant connection. From the state government’s perspective, you are utilizing its public goods and services to help run your business so you become obligated to pay state taxes.
You always have a sales tax nexus to your home state where you run your business, but there may be circumstances that create a sales tax nexus to another state as well.
This can become quite tricky because different states may have slightly different definitions of what comprises a “nexus” in that state. Generally, a nexus is made up of a significant or economic connection to a State. Usually, activities that make up a sales tax nexus include:
● Having a physical presence
Having a physical presence in a state generally makes up a nexus. This includes having an office, warehouse, employees, affiliates, or retail location or storing inventory, manufacturing products, or having any other physical business activity taking place in that state. This even includes a temporary physical presence, like selling at a trade show or major event.
● Having an economic nexus
A nexus can also be created in a state based on economic activity. If you make a certain amount of sales in a state, it can be considered an economic connection significant enough to require you to pay sales tax in that state. The exact amount of sales varies by state, but it can be measured in terms of dollar sales or the number of transactions.
● Of Note To Amazon Sellers
There are specific nexuses that can be created that are of special note to Amazon sellers. A sales tax nexus can be created if you have a drop shipper located in another state, affiliate marketers selling from another state, or by storing your FBA inventory in an Amazon Fulfilment center that is located in another state.
As you can see, there are many ways to create a sales tax nexus in a state. Generally, a nexus is created when you have a physical presence or significant economic presence in another state. As an Amazon seller, you need to carefully consider where your sales, inventory, and marketing initiatives are concentrated so that you can determine whether you have created a sales tax nexus in a state other than your own.
Product taxability works with sales tax nexus to determine whether you need to charge sales tax. Product taxability refers to whether the products you are selling are taxable. If you have a sales tax nexus, the product taxability determines the tax rate, if any, that applies to the product you are selling.
As with many tax categories, different rules apply to different states. Generally, products are taxable while services are not. That said, some products are taxed differently than others, including food, clothing, and other necessities.
You have to research the specific taxability that applies to the product you are selling in the state you are selling it in.
Taxjar has compiled a handy list of sales tax service resources where you can determine your product’s taxability. Since most things sold on Amazon are products and not services, your product will generally be taxable but you should also check for any applicable exceptions that reduce or eliminate the sales tax rate.
Apply for a Sales Tax Permit
Once you’ve determined that you have a nexus, and also that your product is taxable, you will need to apply for a sales tax permit to collect sales tax in a certain State.
Before you can legally collect sales tax as a business, you must have a permit to do so. This is to prevent any fraudulent behavior and to hold the business accountable for collecting and filing tax. Each state handles this process a little differently, and you will have to apply for a sales tax permit in every State in which you have nexus and taxability.
Some blogs have compiled helpful guides to help you apply for a permit in each State.
How To Collect Sales Tax on Amazon
Now that we’ve examined the factors that influence whether or not you have to collect sales tax on your product, let’s take a look at how to go about collecting it.
Collecting sales tax on Amazon isn’t complicated but you do need to know how to do it properly. It is also important to note that Amazon is very user-friendly when it comes to tax. A lot of the time, it even collects tax on the seller’s behalf. For example, Amazon automatically collects tax for FBA sellers in states where there is a fulfillment center because the fulfillment center creates a nexus to that state.
That said, in states where there is not a fulfillment center, you may still need to set up tax rates on Amazon to ensure that you automatically collect on sales. Here is how to do it:
Setting Up Sales Tax Collection
Once you comply with state tax laws by getting a permit to collect sales tax in that state, then you can input this into Amazon so that it automatically collects sales tax every time you make a sale within that state.
Setting it up is easy:
- Log in to Seller Central
- Click Settings
- Click Tax Settings
- Click View & Edit Your Tax Collection and Shipping & Handling and Giftwrap Tax Obligation Settings
Once you are in this menu, you can select the states where you want Amazon to charge sales tax. You need to be sure that you have a permit to do so in each state beforehand. Amazon requires this information so that you don’t illegally collect sales tax without a permit.
Amazon keeps updates of the sales tax that applies to each region and automatically applies the relevant rate that applies to each state.
Set Up Product Tax Codes
You still need to account for the applicable tax rate for the specific product you are selling. As mentioned, there are different tax rates for different products. To apply the correct one to what you’re selling, you need to set up product tax codes to categorize your product. Doing so is pretty simple:
- Go to Seller Central
- Click on Settings
- Click on Tax Settings
- Click on View Master Product Tax Codes and Rules
Once you are in this section, select the tax rates that apply to your products. Amazon keeps detailed and up-to-date records of which tax rates apply to which products. It’s simply a matter of selecting the product category for each item you are selling. Amazon provides options for many products that may have special tax rates, like food, clothing, and textbooks. Once again, the special tax rate depends on the state where you are charging sales tax.
If there is no option to select a special tax rate for your product, that usually means that your product is always taxed and falls under the general sales tax rate. Amazon gives an option for General Tax Rate, so you can just select that during setup.
Wrap-Up on Amazon Tax Settings
As you can see, setting up automated tax collection on Amazon is simple, but it requires knowledge about whether or not sales tax applies to your product and in what state. Once you have a sales tax permit to collect sales tax in that state, then you can head to Seller Central and complete the set-up process outlined above.
Reporting and Filing Sales Tax from Amazon Sales
If you’ve collected sales tax on Amazon sales, you have to report them so you can pay your taxes. Tax season is one of the most confusing times of the year for many people, so we’ll wrap up with an outline of how to file and report the tax you collected from Amazon sales.
How to Get Compliant with Sales Tax
As you can probably guess, states have different ways to file taxes, and some may require different information to report the amount of collected sales tax. Amazon compiles reports that give you all the necessary information to report your sales tax in compliance with state and federal laws.
Reporting and Filing Sales Tax from Amazon Sales
To download a sales tax report from Amazon, you need to once again log in to Seller Central:
- From Seller Central, go to Reports
- Click on Payments
- Click on Generate Date Range Report
Select the range of sales tax data you need to collect for your filing period, and Amazon compiles a report of all the purchases made in this period. From here, you can use this data to collect the information you need to file taxes in your state.
File your taxes as you normally would, either through an online tax reporting system, with the help of an accountant or tax professional, or by compiling the reports on your own. Use the above information to determine how much you owe and make the payment through your state’s payment portal.
Going Forward: Do Your Research!
We have the information you need to determine whether or not you need to collect sales tax and how much you have to collect. As you can see, this is a somewhat complicated area of business. Staying in compliance with tax laws is difficult and time-consuming.
Use our general outline to determine what state you owe taxes to and how to determine the amount of tax you owe. Amazon has many options to help you automate this process while staying up to date with current tax laws.
As an Amazon seller, it’s essential to determine the states where you have nexus and the tax rate that applies to the product you are selling. Then, register this information on Amazon and keep records to file your taxes at the end of the year.
The key is in compiling this information before you start selling. You have to determine your nexus at the outset and then apply for a sales tax permit within that state. New nexuses develop depending on where you make sales and whether you end up doing significant business activities in other states. For this reason, you need to stay on top of all your records and be sure that you are always in compliance with tax laws that might govern your sales.
The above information can help you get started. But remember that sales tax is complicated, which is why so many businesses rely on tax professionals to do this work for them.